Monday, March 1, 2010

Are you transferring wealth to Big Traders?

cxoadvisory.com has done a study of Chinese individual investors which says that:

In summary, evidence from detailed Chinese stock account data indicates that the trading of unsophisticated individuals tends to transfer their wealth to institutions and more sophisticated individuals (and to brokers and the government).


My Notes: This should almost certainly apply to Indian retail traders dabbling in Futures & Options.

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The same web site talks about Refined Short-term Reversal Strategies.

The conclusion is: Short-term stock return reversal is pervasive and larger than previously found, with overreaction to industry-specific discount rate news a principal driver .

A simple way of inferring discount rate shocks is to look for stocks with prices and earnings forecasts moving in opposite directions

My Notes: Difficult to read, isn't it? To buy, search for stocks registering a one month decline, which have robust earnings. The opposite is true for selling, where the trader should look for one month rallies in stocks with earnings disappointments. Please visit the site and read the full article if you wish to practice such a strategy.

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Questions & Answers:

Reader pranav.kulkarni asks:

Dear Sir, One personal question please. How much percent of return you earned last year from trading only??

Answer: For year 2009, the returns were approx 80% on the capital invested in trading. One big gain was the May election gap when I was long in Nifty calls. (The suggestion to buy was given over TV, in this blog , before the results came out.) Now, this was luck, but you must understand that traders get lucky because they remain in business, with managed risks.


Saurabh Asks:

a. Entrance into congestion
b. A trade within a congestion
c. A breakout from a congestion area
d. A trend run
e. Trend reversal

Based on your personal experience which one of these 5 mentioned above would be most profitable, based on historical data ?

My Notes:

The trades that I have never found to be profitable for me are:
a. Entrance into congestion
b. A trade within a congestion
e. Trend reversal

For me, setups that are proftable are:
c. A breakout from a congestion area
d. A trend run

Both of these are actually trend following.

Reversal Trades are profitable when used for Investments. I have explained earlier that I go for themes when investing. Usually, there are no stops. The trades are closed when the theme is no longer avlid.

4 comments:

Saurabh said...

Thanks for the reply Sir .

Also, 80 % return on capital employed deserves a standing ovation. It is mind boggling to imagine what compounding would do to this .

I salute you.

Regards

Saurabh

pranav.kulkarni said...

Dear Sir,
Thank a lot for replying personal question as well.It feels lot better when your queries are solved by none other than your own idol. Thanks once again.

men said...

Mr. Sudarshan, in the present budget what is the theme that you have identified? Could one be permission to set up banks? if yes which co's likely to benefit other than Ifci, Reliance capital.
Also historically investors would tend to do some financial window dressing, so would that be a negative?
Thanks,

Danish Kapur said...

Hi Sudarshan

I have one question. You said that your annual return last year was 80%. Market as a whole returned more than 100%. So, would not it had been better if one had invested in market and left with some tracking here and there rather than spending day and night and still underperforming market as whole. I know one can argue against me giving example of 2007 when markets fell equally but let us take average of last 10 years returns and that will give better picture of one's performance rather than one year.

Thanks
Danish Kapur